“with
the objective of establishing a lasting interest in an enterprise
resident in an economy other than that of the investor (direct
investment enterprise). ”Lasting interest” implies the existence
of a long-term relationship between the direct investor and the
enterprise and a significant degree of influence by the direct
investor on the management of the direct investment enterprise.”

Simply
put, FDI is investment in actual businesses: in factories, services
(eg software development) or other trades. It is important to
distinguish FDI from portfolio investment, which is what happens
when an investor buys shares or lends money to an existing
business.

Portfolio
investment is useful in the long term in helping develop a market for
capital that businesses could potentially tap for future
expansion, but it does not lead to immediate job creation.

FDI
generally implies new investment, which in turn implies that this
creates new jobs. The first step towards improving the livelihood of
people is to be able to offer them jobs. Direct investment is what
generally creates jobs. It does not matter whether the direct
investment is foreign or local, what matters is whether it creates
jobs, preferably well paying ones.

Investment
depends on savings, which is scarce in poor countries. Poor countries
with low incomes have low savings, which in turn means low investment
and few jobs. This is a vicious circle that can be broken if there is
sufficient investment from abroad to make up the local shortfall,
hence the importance of FDI.

High
youth unemployment maybe be expected if investment is low, something
that the statistics seem to bear out. Unemployment in the entire labour
market is much lower (4.4% according to the Central Bank, up from 4%
in 2012) which could be explained by migration for jobs overseas. The
unemployed youth of the country find employment overseas, which
brings down the overall unemployment statistics.

Examining
the composition of Sri Lankan FDI reveals still further weaknesses.
The biggest source of FDI is from Malaysia, the bulk of which comes
from Dialog Axiata, the mobile phone operator. Having spent some
years working for the telecoms industry I can testify that telco
investments in this country (not just those of Dialog, but of the
industry as a whole) are singularly unproductive and create little or
no employment.

Why
is this? The problem lies with the regulator, which does not ensure
that a proper infrastructure sharing regime is in place. Each telco
operator view its infrastructure with a jealous and proprietary eye,
a source of competitive advantage. In simplistic terms the argument
is thus: putting up a new tower opens up a new market. Why share it
with other operators? The bigger operators try to squeeze out the
smaller ones by refusing to share their infrastructure. Nothing
illustrates this better than Airtel's experience when they entered
Sri Lanka in 2008.

The
telco market was fairly well developed by 2008 so there was little
need to invest in the major towns. The large operators however
refused to share their infrastructure with Airtel, hoping to
frustrate them in to quitting the industry. After languishing for a
while Airtel decided that they would stay but were forced to start
building their own network from scratch, an expensive and wasteful
process.

Building a bridge across a river is very useful and allows communities on either side to trade. Building multiple bridges in the same area serves no purpose. It is the same with duplicated telco infrastructure.

Naturally
this new investment would have been reflected in a favourable boost
in the FDI statistics but it would have created little in the way of
increased productivity or employment since the country had no need
for an entire new network, built from scratch. This is the sorry tale
that is played out on a larger scale in the industry as a whole.

It
is not that there is no sharing at all, there is some sharing, but
almost always on a limited reciprocal basis. An operator usually
needs to give access on one of their own towers before they can hope
to get anything anywhere else. Certain critical parts, such as SLT's
fibre backbone are pretty much closed off. If this where shared
properly a lot of radio towers would be redundant.

Not
only is the lack of sharing wasteful, it is also ugly, as towers not
strictly necessary scar the landscape, destroying the view of the
countryside, not to mention creating a huge unnecessary drain on power
(the towers consume a lot of electricity). The carbon footprint alone should be enough incentive for the regulator to ensure proper sharing, never mind the strain on the electricity system, which itself is in crisis.

The financial losses are
evident in the low return on investments seen in the telco sector
which should be of concern to their shareholders and bankers (see note below). Unfortunately, the much larger social price for these white elephants
is paid by society at large.

The
regulator exists to ensure that these social costs are minimised.
Instead of doing its job, the TRC is building a massive tower of its
own on the Beira lake, doubtless to the great satisfaction of the
building contractor and the people involved in doling out the juicy
contracts. Why bother to regulate, when there are more interesting
opportnities for personal enrichment through doling out construction
contracts?

Another
contributor to FDI are the Chinese infrastructure projects – which
again create few jobs or opportunities since they are built with
Chinese labour and use a high volume of imported material. The FDI
comes in but a lot of it simply then goes out, leaving the economy
itself little benefited.

Thus
not only is the FDI number declining, a fair chunk of what comes in
creates little economic impact, which means things are even worse than they seem.

Note:SLT reported an ROI of 6.8% in 2013 and 6.35% in 2012, while Dialog reported an ROI of 9.42% and 14.07%. Return was calculated using profit and adding back net interest cost. This was divided by equity and total borrowings. As the telco sector is highly geared it is necessary to include debt as part of the investment.

4 comments:

Very good summary assessment. I think it's also a case of FDI not knowing what sectors to come into here and the 'good' FDI not wanting to dabble in a country with a dodgy regime. They have far more secure and lucrative options in other middle-income countries. Those with better governance and rule of law, wider skill pool, greater openness to trade, more efficient product markets, and better regulatory environment.

Jack, I've come here through Rajarata's blog. you make an interesting argument here and I generally agree that more investment must produce jobs and be used for productive purposes.

I've argued on Rajaratarala's blog that the foreign remittances which are a huge pool of potential investment should be channeled into productive investments rather than just buying land and consumer goods inflating prices in those without a corresponding increase in jobs.

i think the Rajapaksa port in Hambantota has great potential to transform that region of Sri Lanka from agricultural to more industrial, and that project makes sense as do the highways and bridges in many cases.

The foreign remittances actually play an important role in supporting domestic trade - this is what helps pay the grocery bills, the electricity and telephone bills etc(apart from consumer goods and land/property)and will contribute indirectly to investment in those sectors by the businesses within the sector.

Any savings (from remittances) that remain within the banking sector would be channeled to investment via bank lending.